Silver Fern Farms (SFF) has been forced to take what chief executive Dean Hamilton calls a prudent approach to livestock procurement. This is code for being hard up against the company’s banking facility, directly as a result of greater livestock availability. A longer season in the North Island and pressure from drought in North Canterbury are responsible for this situation, writes Allan Barber.

An in-house message to livestock buyers explains the company’s inability to handle all its potential livestock bookings and says it may be necessary to assist some suppliers in finding alternative slaughter capacity. The last time I can recall this happening was more than 20 years ago when industrial action forced AFFCO to get Weddel to kill on its behalf.

Clearly SFF has taken the sensible step of implementing seasonal closures at some large plants, such as Paeroa in the Waikato and Fairton in the South Island. Unfortunately, the pursuit of cost savings has clashed with the longer than expected flow of livestock, but it would be financially unsustainable if not impossible to reopen these plants.

The other major factor is the state of the export market which is scarcely conducive to killing and processing more product than absolutely necessary at this time of year. As Hamilton told me, there is no point in filling up the chillers and freezers when the market is as soft as it is at the moment. He could well have added that the company’s bankers wouldn’t have allowed it anyway.

The internal communication to the buyers makes it plain SFF must live within its means which hasn’t been the case for the last three or four years. The hope is expressed that this will create more flexibility next season. However, the $1.3 billion spent on livestock so far this year is greater than last year which indicates the company has yet again failed to live within its means.

Three years ago SFF suffered because it failed to meet the market which resulted in too much inventory having to be written down, causing substantial losses over two financial years.

SFF is suffering the ultimate meat industry conundrum: how to run all its plants at optimum capacity when its bankers impose facility limits which render this difficult or downright impossible in prevailing market conditions; another dimension of the conundrum is the conflict between satisfying supplier demand for slaughter space and the inability to turn this into cash.

The meat industry went through this scenario in the 1990s resulting in Weddel and Fortex receiverships with AFFCO only being saved by Weddel going through first and the forgiveness of a large amount of debt. This resulted in a capital restructure which allowed AFFCO to survive, prosper briefly and finally be taken over by Talley’s Group which had deep enough pockets to ensure its long term survival.

SFF is faced with a similar set of problems which can only be resolved by a capital restructure. The shareholder group’s attempts to force a review of the potential for a merger with Alliance are doomed to fail, because the state of the balance sheet and bank constraints make a merger impossible. There are also rumours about the closure of SFF’s overseas offices.

It appears the result of the equity raising process carried out by Goldman Sachs will finally be available for communication to shareholders in August. Unless the shareholders can come up with a minimum of $100 million, and even this may not be enough, they will have no entitlement to influence the company’s future. There may be no alternative to bringing in outside capital to recapitalise all or part of the business.

At that point, shareholders’ only option may be to express their displeasure by sending their livestock to another processor, but realistically their options may not be great. They may well be faced with Hobson’s choice.

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